Analysts overestimated corporate earnings in 8 out of last 10 years: Ambit

The overestimation was at its worst in FY16 and FY17, resulting in a negative divergence of 24% and 25%, respectively. However, two years, FY11 and FY19, also saw underestimation resulting in a positive divergence of 14% and 4%.

“There are two reasons for this. First, analysts have not been able to anticipate major negative events such as the European debt crisis, demonetization, GST rollout, IL&FS crisis and the covid-19 pandemic. Second, when markets run-up due to liquidity and valuations get stretched, analysts probably are over-optimistic to defend valuations," said Sushant Bhansali, chief executive officer of Ambit Asset Management.

Analysts are also afraid of sticking their neck out and moving away from the herd. Being from when you are an outlier is far worse than being wrong when you are part of the consensus, said a CEO of a portfolio management services (PMS) provider on condition of anonymity.

In the context of India, companies added capacity and took on debt at the start of this decade and the effects of that have caused corporate profits to lag even the GDP growth, said Vikas Gupta, CEO and chief investment strategist, OmniScience Capital. “Earnings estimates for FY21 and FY22 are particularly unreliable. You need to conduct a scenario analysis for future years and decide on the basis of that," he added.

Equity investors, including those in the equity mutual funds, are often influenced by forecasts of corporate earnings by analysts. However, they should factor in this consistent overestimation in their decisions.

A disciplined approach through systematic investment plans (SIPs) and systematic transfer plans (STPs) should prevail over the news or analyst call-based lumpsum investment.